Stock dividends, stock splits, and signaling

Article Abstract:

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecasts errors. This suggests that earnings forecasts errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete. (Reprinted by permission of the publisher.)

Telecommunications systems

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Corporate control and the choice of investment financing: the case of corporate acquisitions

Article Abstract:

We test the proposition that corporate control considerations motivate the means of investment financing - cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership. (Reprinted by permission of the publisher.)

Acquisitions and mergers, Management, Control

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Stock splits and stock dividends: why, who, and when

Article Abstract:

This study investigates empirically why firms split their stock or distribute stock dividends and why the market reacts favorably to these distributions. The findings suggest that stock splits are mainly aimed at restoring stock prices to a "normal range." Some support can also be found for the oft-mentioned signalling motive of stock splits. Stock dividends are altogether different from stock splits, and they appear to be a decreasing phenomenon. The clue to stock dividend distributions may lie in their perceived substitution for relatively low cash dividends. (Reprinted by permission of the publisher.)

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